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TSP Investment Moves That Could Help Federal Employees Retire on Their Own Terms

Jeff Boettcher
December 20, 2024

Key Takeaways:

Strategic investments in your TSP can set you up for a more flexible and secure retirement, letting you decide when and how to retire.
Understanding TSP fund options and making timely adjustments are critical to maximizing your retirement savings and reducing risks as you approach retirement age.

A Roadmap to Financial Freedom

Also Read: Early Retirement Myths Federal Employees Need to Stop Believing
Also Read: The Surprisingly Modern Perks of CSRS and What It Means for Longtime Federal Employees
Also Read: Think You Know Your Federal Benefits? Here’s What Most Employees Don’t Realize They Have

Retirement is more than just a goal—it’s a lifestyle decision. As a federal employee, your Thrift Savings Plan (TSP) is one of the most powerful tools to help you retire on your terms. But achieving financial freedom requires more than just contributing consistently. You need to make strategic moves within your TSP to maximize its growth, protect your savings, and align your investments with your retirement vision.

In this guide, we’ll break down how to optimize your TSP investments, adjust them over time, and navigate the path to a secure retirement with confidence.

Why Your TSP Is the Key to a Comfortable Retirement

The TSP isn’t just a savings account—it’s a retirement powerhouse. With low administrative fees, a diverse range of funds, and tax advantages, it’s designed to help federal employees build substantial wealth over time. But to unlock its full potential, you’ll need to actively manage your TSP, especially as your career progresses.

Understanding the Basics

At its core, the TSP offers five individual funds and several Lifecycle (L) Funds that automatically adjust your investments based on your retirement timeline. Each option carries its own risk and reward profile:

G Fund: Guaranteed returns with minimal risk.
F Fund: Tracks bond market performance.
C Fund: Invests in large U.S. companies, mirroring the S&P 500.
S Fund: Focuses on small- to medium-sized U.S. companies.
I Fund: Provides international exposure through foreign company investments.

Lifecycle Funds simplify investing by automatically rebalancing your portfolio as you approach retirement, reducing your exposure to riskier assets over time.

Step 1: Assess Your Retirement Goals

The first move you need to make is clarifying your retirement vision. When do you want to retire, and how much income will you need?

Timeline Matters

If you’re early in your career, you have the advantage of time. Compounding interest can work wonders when you start saving aggressively in higher-growth funds like the C or S Fund. As you get closer to retirement, transitioning to safer investments like the G Fund becomes more important to preserve your hard-earned savings.

Calculate Your Retirement Needs

Use your expected annual expenses to estimate how much you’ll need in retirement. Aim for a retirement portfolio that can replace 70% to 80% of your pre-retirement income. Don’t forget to consider other income sources like Social Security or pensions.

Step 2: Maximize Contributions While You Can

The federal government gives you a great opportunity to boost your savings by contributing to your TSP. But are you taking full advantage of it?

Contribution Limits

For 2024, you can contribute up to $23,000, with an additional $7,500 in catch-up contributions if you’re 50 or older. By contributing the maximum, you give your money the best chance to grow.

Employer Matching

If you’re under the Federal Employees Retirement System (FERS), the government matches up to 5% of your salary. Not contributing enough to earn the full match is leaving free money on the table.

Step 3: Diversify Your Portfolio

Diversification is the cornerstone of any successful investment strategy. It protects your savings by spreading risk across different types of investments.

Mix It Up

While it’s tempting to chase the highest returns, putting all your eggs in one basket can backfire. A good starting point is to allocate your contributions among the C, S, and I Funds for growth, and the G and F Funds for stability. Adjust your allocation based on your risk tolerance and retirement timeline.

Lifecycle Funds for Simplicity

Not a fan of managing your portfolio yourself? Lifecycle Funds are a great option. They automatically balance your investments based on your target retirement date, shifting to safer options as you near retirement.

Step 4: Rebalance Regularly

Markets fluctuate, and so should your TSP allocations. Rebalancing ensures your portfolio stays aligned with your goals and risk tolerance.

Set a Schedule

Revisit your TSP investments at least once a year or after major life events like a promotion, marriage, or the birth of a child. Adjusting your allocations keeps your portfolio on track.

Step 5: Minimize Fees and Taxes

Hidden costs can eat into your retirement savings. The TSP’s low fees are a big advantage, but you still need to consider tax implications when withdrawing funds.

Traditional vs. Roth TSP

Traditional TSP: Contributions are pre-tax, but withdrawals are taxed.
Roth TSP: Contributions are after-tax, but withdrawals are tax-free.

Choosing the right option depends on your current income and expected tax bracket in retirement. Many employees find a mix of both Traditional and Roth contributions offers flexibility.

Avoid Early Withdrawals

Withdrawing funds before age 59½ usually incurs penalties and taxes. Only tap into your TSP in emergencies.

Step 6: Prepare for Market Downturns

Market volatility is a reality of investing, but how you respond makes all the difference.

Stay the Course

Avoid panic-selling when markets dip. The TSP is a long-term investment, and temporary losses often recover with time. If anything, downturns can be an opportunity to buy more shares at a lower price.

Adjust Risk as You Age

As you approach retirement, shift more of your portfolio into conservative investments like the G and F Funds to reduce the impact of market swings.

Step 7: Understand Withdrawal Options

Once you retire, your focus shifts from growing your TSP to drawing income. Understanding your withdrawal options is crucial.

Flexible Withdrawals

You can take one-time partial withdrawals, set up regular payments, or purchase an annuity for guaranteed income. Each option has its pros and cons, so choose based on your needs.

Required Minimum Distributions (RMDs)

Starting at age 73, the IRS requires you to take RMDs from your TSP. Plan ahead to ensure your withdrawals align with your income needs and tax strategy.

Make Your TSP Work for You

Your TSP isn’t just an account—it’s a tool to build the future you’ve always envisioned. By taking a proactive approach, you can maximize your savings, minimize risks, and retire when and how you want.

Remember, every decision you make today shapes the retirement you’ll enjoy tomorrow. Start by assessing your goals, maximizing your contributions, and maintaining a balanced portfolio. Adjust your strategies as you age, and don’t forget to review your plan regularly.

With the right moves, your TSP can be the key to retiring on your own terms, giving you the freedom and security you deserve after years of hard work.

Jeff Boettcher

For over 20 years, Jeff Boettcher has helped his clients grow and protect their retirement savings. "each time I work with my clients, I'm building their future, and there are few things that are more important to a family than a stable financial foundation."

Jeff is known for his ability to make the complex simple while helping navigate his clients through the challenges of making the right investment decisions. When asked what he is most passionate about professionally, his answer was true to character, "Helping my clients – I love being able to solve their problems. People are rightfully concerned about their retirement income, when they can retire, how to maximize their financial safety and future income." Jeff started Bedrock Investment Advisors for clients who value a close working relationship with their advisors.

A Michigan native, Jeff grew up playing sports throughout high school and into college. While Jeff is still an 'aging' athlete, Jeff will take more swings on the golf course than miles running these days. He creates family time, often with weekly excursions to play golf, a hobby he shares with his three young children.

Disclosure: Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice has been filed, or is excluded from notice filing requirements. This information is not a complete analysis of the topic(s) discussed, is general in nature, and is not personalized investment advice. Nothing in this article is intended to be investment advice. There are risks involved with investing which may include (but are not limited to) market fluctuations and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making any investment decision. You should consult a professional tax or investment advisor regarding tax and investment implications before taking any investment actions or implementing any investment strategies.